How sensex works?
Sensex Calculation Methodology
Sensex is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.
The base period of Sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of Sensex involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor.
The Divisor is the only link to the original base period value of the Sensex. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate Sensex every 15 seconds and disseminated in real time.
Understanding Free-float Methodology
Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market.
It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market.
To use a live example, the market value of Tata Consultancy Services (TCS) is Rs 103,351 crore since it has 97.86 crore shares having a value of Rs 1,056 (on August 17).
Now, a free-float index such as the Sensex claims to reflect market trends more rationally as it takes into consideration only those shares that are available for trading in the market.
In our example, TCS might have a total of 97.86 crore shares but in reality only 19.57 crore shares are available as the rest are treated as 'controlling/strategic holdings'. This pegs the free-float factor of TCS at 0.20 (19.57/97.86) and free-float market value at Rs 20,670.20 crore.
So, if you add up the current free-float market values of all the 30 companies, you will get the numerator for the Sensex formula.
Example
Suppose the Index consists of only 2 stocks: Stock A and Stock B.
Suppose company A has 1,000 shares in total, of which 200 are held by the promoters, so that only 800 shares are available for trading to the general public. These 800 shares are the so-called 'free-floating' shares.
Similarly, company B has 2,000 shares in total, of which 1,000 are held by the promoters and the rest 1,000 are free-floating.
Now suppose the current market price of stock A is Rs 120. Thus, the 'total' market capitalisation of company A is Rs 120,000 (1,000 x 120), but its free-float market capitalisation is Rs 96,000 (800 x 120).
Similarly, suppose the current market price of stock B is Rs 200. The total market capitalisation of company B will thus be Rs 400,000 (2,000 x 200), but its free-float market cap is only Rs 200,000 (1,000 x 200).
So as of today the market capitalisation of the index (i.e. stocks A and B) is Rs 520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalisation of the index is Rs 296,000. (Rs 96,000 + Rs 200,000).
The year 1978-79 is considered the base year of the index with a value set to 100. What this means is that suppose at that time the market capitalisation of the stocks that comprised the index then was, say, 60,000 (remember at that time there may have been some other stocks in the index, not A and B, but that does not matter), then we assume that an index market cap of 60,000 is equal to an index-value of 100.
Thus the value of the index today is = 296,000 x 100/60,000 = 493.33
This is how the Sensex is calculated.
The factor 100/60000 is called index divisor.
What moves sensex?
As the Sensex consists of 30 different companies, all of them have different share prices, free-float adjustment factors, free-float market value and weightage in the index. Just like the grandfather in a joint family, the company that enjoys most weightage in the Sensex is Reliance Industries (RIL). Out of the 100 per cent weight of the Sensex, RIL currently has a 13.18 per cent weight.
With the top five companies, in terms of weightage, occupying nearly 50 per cent index — any movements in these five in the same direction could move nearly half of the Sensex!
Importance of weightage: In the chart, HDFC Bank has an index weight of 3.17 per cent — which is less than half of L&T (6.36 per cent).
This is why a comparatively higher Rs 56 increase in share price has effectively contributed to 22.7 index points for HDFC Bank.
On the other hand, L&T, which is two times heavier, has pitched in with 19.1 points with just a relatively lower gain of Rs 49.
Example : Find below comapny and its effect on sensex as on 5/3/2008
Mar 5, 2008 1:30:00 PM
BSE Index: 16,372.6 (+33 pts/0.2%)
1 US$ = Rs 40.36
COMPANY
INDUSTRY
MARKET PRICE
(Rs)
% CHANGE
NO OF
SHARES (m)
MARKET CAP.**
(Rs m)
WEIGHTAGE
(%)
EARNINGS *
(Rs m)
EPS(Rs)
PER(X)
ACC LIMITED
CEMENT
743.5
-0.3
186.7
138,820
0.6
14,386
77.0
9.6
AMBUJA CEMENTS
CEMENT
121.4
1.2
1,522.4
184,740
0.8
17,691
11.6
10.4
BAJAJ AUTO
AUTO
2,170.0
-1.4
101.2
219,552
1.0
11,980
118.4
18.3
BHARTI AIRTEL
TELECOM
748.5
-2.7
1,897.7
1,420,411
6.4
58,150
30.6
24.4
BHEL
ENGINEERING
2,075.7
-1.1
489.5
1,016,029
4.6
28,989
59.2
35.0
CIPLA
PHARMA
204.9
1.5
777.2
159,209
0.7
4,963
6.4
32.1
DLF LIMITED
CONSTRUCTION
670.0
-1.2
1,704.8
1,142,216
5.1
19,437
11.4
58.8
GRASIM
DIVERSIFIED
2,843.0
1.5
91.7
260,630
1.2
24,135
263.3
10.8
HDFC
FIN. INSTITUTIONS
2,680.0
1.6
249.6
668,871
3.0
14,467
58.0
46.2
HDFC BANK
BANKING
1,335.0
-1.6
364.3
486,341
2.2
11,414
31.3
42.6
HIND. UNILEVER
FMCG
226.0
-1.3
2,206.6
498,692
2.2
19,255
8.7
25.9
HINDALCO
ALUMINIUM
201.9
1.0
1,226.0
247,529
1.1
25,097
20.5
9.9
ICICI BANK
BANKING
961.0
-1.1
1,118.8
1,075,167
4.8
31,102
27.8
34.6
INFOSYS
SOFTWARE
1,475.7
3.9
573.3
846,037
3.8
43,060
75.1
19.6
ITC
FMCG
188.6
2.0
3,762.0
709,325
3.2
30,349
8.1
23.4
L&T
ENGINEERING
3,203.5
-0.6
286.8
918,678
4.1
19,074
66.5
48.2
M&M
AUTO
694.3
-1.6
239.1
165,988
0.7
11,183
46.8
14.8
MARUTI SUZUKI
AUTO
920.6
1.6
288.9
265,970
1.2
18,817
65.1
14.1
NTPC
POWER
193.9
1.9
8,246.0
1,598,899
7.2
78,100
9.5
20.5
ONGC
ENERGY SOURCES
990.0
3.3
2,138.9
2,117,484
9.5
167,562
78.3
12.6
RANBAXY
PHARMA
448.5
-0.4
373.0
167,272
0.7
7,901
21.2
21.2
REL. ENERGY
POWER
1,452.9
-3.4
236.5
343,594
1.5
10,107
42.7
34.0
RELIANCE
PETROCHEMICALS
2,236.0
-0.2
1,396.0
3,121,456
14.0
105,570
75.6
29.6
RELIANCE COMM
TELECOM
512.3
-0.4
2,062.8
1,056,683
4.7
52,899
25.6
20.0
SATYAM
SOFTWARE
423.0
4.0
684.7
289,628
1.3
12,283
17.9
23.6
SBI
BANKING
1,843.0
-1.7
526.3
969,969
4.3
39,015
74.1
24.9
TATA MOTORS
AUTO
704.5
0.4
385.5
271,594
1.2
20,694
53.7
13.1
TATA STEEL
STEEL
793.5
2.0
609.0
483,213
2.2
45,802
75.2
10.6
TCS
SOFTWARE
872.1
2.2
978.6
853,397
3.8
45,531
46.5
18.7
WIPRO
SOFTWARE
425.0
1.9
1,459.0
620,075
2.8
30,473
20.9
20.3
TOTAL
36,183
22,317,469
100.0
1,019,486
AVG. PER
21.9
Now find below some of the effect on sensex when stock moves
1)Reliance 1% moves = 22.3 points moves in sensex
2)ONGC 1% move =15.5 points moves in sensex
3) NTPC 1% = 11.8 in sensex
4) Bharti 1% = 10 points
5) BHEL & ICICI 1% = 7.8 points
6) Infosys 1% = 6.2 points
So if you know the % movement of above 6 stock you can predict the sensex near value where is it right know without seeing sensex inddex. If you know all 30 then you are like magician telling exact figure of sensex without knowing or seeing at a time!!!
look at weightage column in above table, you will find that which share controls the sensex !!!!
So when you find the big crash or big jump then you surely able to say which shares are moving without referring or seeing anything!!
Take look at onther example: Calculation of sensex (Today 5/3/2008)
Market cap =22,317,469 (time :1:30 PM) sensex at 1:30 PM = 16,372
Market cap = 22,482,869 (time:3:19)
So sensex at time 3:19 PM?
22,482,869X100/22,317,469 = 100.74 points more then 16372
senex at 3.30 PM today = nearly 16,472 (check it out )!!
& FYI at BSE & NSE it is refreshed after every 15 seconds by above calculation used.
Now next time you will surely enjoy the movements!!!!!!
Sensex Calculation Methodology
Sensex is calculated using the "Free-float Market Capitalization" methodology. As per this methodology, the level of index at any point of time reflects the Free-float market value of 30 component stocks relative to a base period. The market capitalization of a company is determined by multiplying the price of its stock by the number of shares issued by the company. This market capitalization is further multiplied by the free-float factor to determine the free-float market capitalization.
The base period of Sensex is 1978-79 and the base value is 100 index points. This is often indicated by the notation 1978-79=100. The calculation of Sensex involves dividing the Free-float market capitalization of 30 companies in the Index by a number called the Index Divisor.
The Divisor is the only link to the original base period value of the Sensex. It keeps the Index comparable over time and is the adjustment point for all Index adjustments arising out of corporate actions, replacement of scrips etc. During market hours, prices of the index scrips, at which latest trades are executed, are used by the trading system to calculate Sensex every 15 seconds and disseminated in real time.
Understanding Free-float Methodology
Free-float Methodology refers to an index construction methodology that takes into consideration only the free-float market capitalisation of a company for the purpose of index calculation and assigning weight to stocks in Index. Free-float market capitalization is defined as that proportion of total shares issued by the company that are readily available for trading in the market.
It generally excludes promoters' holding, government holding, strategic holding and other locked-in shares that will not come to the market for trading in the normal course. In other words, the market capitalization of each company in a Free-float index is reduced to the extent of its readily available shares in the market.
To use a live example, the market value of Tata Consultancy Services (TCS) is Rs 103,351 crore since it has 97.86 crore shares having a value of Rs 1,056 (on August 17).
Now, a free-float index such as the Sensex claims to reflect market trends more rationally as it takes into consideration only those shares that are available for trading in the market.
In our example, TCS might have a total of 97.86 crore shares but in reality only 19.57 crore shares are available as the rest are treated as 'controlling/strategic holdings'. This pegs the free-float factor of TCS at 0.20 (19.57/97.86) and free-float market value at Rs 20,670.20 crore.
So, if you add up the current free-float market values of all the 30 companies, you will get the numerator for the Sensex formula.
Example
Suppose the Index consists of only 2 stocks: Stock A and Stock B.
Suppose company A has 1,000 shares in total, of which 200 are held by the promoters, so that only 800 shares are available for trading to the general public. These 800 shares are the so-called 'free-floating' shares.
Similarly, company B has 2,000 shares in total, of which 1,000 are held by the promoters and the rest 1,000 are free-floating.
Now suppose the current market price of stock A is Rs 120. Thus, the 'total' market capitalisation of company A is Rs 120,000 (1,000 x 120), but its free-float market capitalisation is Rs 96,000 (800 x 120).
Similarly, suppose the current market price of stock B is Rs 200. The total market capitalisation of company B will thus be Rs 400,000 (2,000 x 200), but its free-float market cap is only Rs 200,000 (1,000 x 200).
So as of today the market capitalisation of the index (i.e. stocks A and B) is Rs 520,000 (Rs 120,000 + Rs 400,000); while the free-float market capitalisation of the index is Rs 296,000. (Rs 96,000 + Rs 200,000).
The year 1978-79 is considered the base year of the index with a value set to 100. What this means is that suppose at that time the market capitalisation of the stocks that comprised the index then was, say, 60,000 (remember at that time there may have been some other stocks in the index, not A and B, but that does not matter), then we assume that an index market cap of 60,000 is equal to an index-value of 100.
Thus the value of the index today is = 296,000 x 100/60,000 = 493.33
This is how the Sensex is calculated.
The factor 100/60000 is called index divisor.
What moves sensex?
As the Sensex consists of 30 different companies, all of them have different share prices, free-float adjustment factors, free-float market value and weightage in the index. Just like the grandfather in a joint family, the company that enjoys most weightage in the Sensex is Reliance Industries (RIL). Out of the 100 per cent weight of the Sensex, RIL currently has a 13.18 per cent weight.
With the top five companies, in terms of weightage, occupying nearly 50 per cent index — any movements in these five in the same direction could move nearly half of the Sensex!
Importance of weightage: In the chart, HDFC Bank has an index weight of 3.17 per cent — which is less than half of L&T (6.36 per cent).
This is why a comparatively higher Rs 56 increase in share price has effectively contributed to 22.7 index points for HDFC Bank.
On the other hand, L&T, which is two times heavier, has pitched in with 19.1 points with just a relatively lower gain of Rs 49.
Example : Find below comapny and its effect on sensex as on 5/3/2008
Mar 5, 2008 1:30:00 PM
BSE Index: 16,372.6 (+33 pts/0.2%)
1 US$ = Rs 40.36
COMPANY
INDUSTRY
MARKET PRICE
(Rs)
% CHANGE
NO OF
SHARES (m)
MARKET CAP.**
(Rs m)
WEIGHTAGE
(%)
EARNINGS *
(Rs m)
EPS(Rs)
PER(X)
ACC LIMITED
CEMENT
743.5
-0.3
186.7
138,820
0.6
14,386
77.0
9.6
AMBUJA CEMENTS
CEMENT
121.4
1.2
1,522.4
184,740
0.8
17,691
11.6
10.4
BAJAJ AUTO
AUTO
2,170.0
-1.4
101.2
219,552
1.0
11,980
118.4
18.3
BHARTI AIRTEL
TELECOM
748.5
-2.7
1,897.7
1,420,411
6.4
58,150
30.6
24.4
BHEL
ENGINEERING
2,075.7
-1.1
489.5
1,016,029
4.6
28,989
59.2
35.0
CIPLA
PHARMA
204.9
1.5
777.2
159,209
0.7
4,963
6.4
32.1
DLF LIMITED
CONSTRUCTION
670.0
-1.2
1,704.8
1,142,216
5.1
19,437
11.4
58.8
GRASIM
DIVERSIFIED
2,843.0
1.5
91.7
260,630
1.2
24,135
263.3
10.8
HDFC
FIN. INSTITUTIONS
2,680.0
1.6
249.6
668,871
3.0
14,467
58.0
46.2
HDFC BANK
BANKING
1,335.0
-1.6
364.3
486,341
2.2
11,414
31.3
42.6
HIND. UNILEVER
FMCG
226.0
-1.3
2,206.6
498,692
2.2
19,255
8.7
25.9
HINDALCO
ALUMINIUM
201.9
1.0
1,226.0
247,529
1.1
25,097
20.5
9.9
ICICI BANK
BANKING
961.0
-1.1
1,118.8
1,075,167
4.8
31,102
27.8
34.6
INFOSYS
SOFTWARE
1,475.7
3.9
573.3
846,037
3.8
43,060
75.1
19.6
ITC
FMCG
188.6
2.0
3,762.0
709,325
3.2
30,349
8.1
23.4
L&T
ENGINEERING
3,203.5
-0.6
286.8
918,678
4.1
19,074
66.5
48.2
M&M
AUTO
694.3
-1.6
239.1
165,988
0.7
11,183
46.8
14.8
MARUTI SUZUKI
AUTO
920.6
1.6
288.9
265,970
1.2
18,817
65.1
14.1
NTPC
POWER
193.9
1.9
8,246.0
1,598,899
7.2
78,100
9.5
20.5
ONGC
ENERGY SOURCES
990.0
3.3
2,138.9
2,117,484
9.5
167,562
78.3
12.6
RANBAXY
PHARMA
448.5
-0.4
373.0
167,272
0.7
7,901
21.2
21.2
REL. ENERGY
POWER
1,452.9
-3.4
236.5
343,594
1.5
10,107
42.7
34.0
RELIANCE
PETROCHEMICALS
2,236.0
-0.2
1,396.0
3,121,456
14.0
105,570
75.6
29.6
RELIANCE COMM
TELECOM
512.3
-0.4
2,062.8
1,056,683
4.7
52,899
25.6
20.0
SATYAM
SOFTWARE
423.0
4.0
684.7
289,628
1.3
12,283
17.9
23.6
SBI
BANKING
1,843.0
-1.7
526.3
969,969
4.3
39,015
74.1
24.9
TATA MOTORS
AUTO
704.5
0.4
385.5
271,594
1.2
20,694
53.7
13.1
TATA STEEL
STEEL
793.5
2.0
609.0
483,213
2.2
45,802
75.2
10.6
TCS
SOFTWARE
872.1
2.2
978.6
853,397
3.8
45,531
46.5
18.7
WIPRO
SOFTWARE
425.0
1.9
1,459.0
620,075
2.8
30,473
20.9
20.3
TOTAL
36,183
22,317,469
100.0
1,019,486
AVG. PER
21.9
Now find below some of the effect on sensex when stock moves
1)Reliance 1% moves = 22.3 points moves in sensex
2)ONGC 1% move =15.5 points moves in sensex
3) NTPC 1% = 11.8 in sensex
4) Bharti 1% = 10 points
5) BHEL & ICICI 1% = 7.8 points
6) Infosys 1% = 6.2 points
So if you know the % movement of above 6 stock you can predict the sensex near value where is it right know without seeing sensex inddex. If you know all 30 then you are like magician telling exact figure of sensex without knowing or seeing at a time!!!
look at weightage column in above table, you will find that which share controls the sensex !!!!
So when you find the big crash or big jump then you surely able to say which shares are moving without referring or seeing anything!!
Take look at onther example: Calculation of sensex (Today 5/3/2008)
Market cap =22,317,469 (time :1:30 PM) sensex at 1:30 PM = 16,372
Market cap = 22,482,869 (time:3:19)
So sensex at time 3:19 PM?
22,482,869X100/22,317,469 = 100.74 points more then 16372
senex at 3.30 PM today = nearly 16,472 (check it out )!!
& FYI at BSE & NSE it is refreshed after every 15 seconds by above calculation used.
Now next time you will surely enjoy the movements!!!!!!